Project Update

EITF Issue No. 16-C: Determining the Customer of the Operation Services in a Service Concession Arrangement

Last updated on May 18, 2017. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective and Background

A service concession arrangement (SCA) is an arrangement between a grantor (a government or public sector entity) and an operating entity whereby the operating entity will operate the grantor’s infrastructure (for example, airports, roads, bridges, tunnels, prisons, and hospitals) for a specified period of time. The operating entity may also maintain the infrastructure, and may also be required to provide periodic capital-intensive maintenance (major maintenance) to enhance or extend the life of the infrastructure. The infrastructure may already exist or may be constructed by the operating entity during the period of the SCA.

In exchange for providing its services, the operating entity may receive payments from the grantor, may be given the right to charge the public (third-party users) to use the infrastructure, and/or may receive an unconditional guarantee from the grantor (that is, a minimum guaranteed amount to be received by the operating entity). In some cases, the operating entity may be required to make payments to the grantor. For example, it may be required to pay the grantor a specified percentage of the consideration received from third-party users over a specified amount, or it may be required to make an upfront cash payment to the grantor in exchange for the right to operate the grantor's infrastructure and charge users of the infrastructure.

Accounting Standards Update No. 2014-05, Service Concession Arrangements (Topic 853), was issued in January 2014. Update 2014-05 states that SCAs are within the scope of Topic 853 when (a) the grantor controls or has the ability to modify or approve the services the operating entity must provide with the infrastructure, to whom it must provide them, and at what price and (b) the grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. For SCAs within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease (because the operating entity does not have the right to control the use of the grantor's infrastructure) or as property, plant, and equipment (PP&E) (because the operating entity does not control or have title to the infrastructure under the terms of the arrangement).

Topic 853 does not provide further guidance on what asset, if any, the operating entity should recognize. Instead, an operating entity should look to other Topics, as applicable, to account for the various aspects of an SCA. However, the application of other Topics to the unique nature of SCAs has recently led to a number of accounting questions, including questions related to the application of Topic 605, Revenue Recognition, when accounting for construction and operation services, and major maintenance.

Depending on the terms of a particular SCA, some stakeholders have asserted that the third-party users can be the customer of the operation services, while other stakeholders have asserted that the grantor is always the customer of the operation services considering the scope of, and decisions reflected in, Topic 853. The primary question addressed by this project is the determination of the customer of the operations services of an SCA within the scope of Topic 853.

Decisions Reached at Last Meeting (March 29, 2017)

On March 29, 2017, the Board ratified the consensus reached at the March 16, 2017 EITF meeting. The Board directed the staff to draft an Accounting Standards Update reflecting the consensus for vote by written ballot.

The Task Force reached a consensus that the grantor is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853.

The Task Force also reached a consensus to not require additional disclosures about how an operating entity determines the customer of the operation services because it would not result in any incremental information for financial statement users.

Effective Date and Transition for Entities that Do Not Adopt Topic 606 Before the Finalization of the Update

An entity that has not adopted the amendments in Topic 606 by the time the amendments in this Update are finalized should adopt the amendments in this Update at the same time it adopts the amendments in Topic 606, and should apply the same transition requirements for Topic 606.

Early adoption of the amendments in this Update before an entity adopts Topic 606 is permitted for all entities, including early adoption within an interim period.

An entity that elects to early adopt the amendments in this Update prior to the adoption of Topic 606 should apply the amendments in this Update using either (a) a retrospective approach or (b) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption.

An entity must apply the same practical expedients elected in Topic 606, to the extent applicable when applying the proposed amendments in this Update. If an entity adopts the amendments in this Update prior to adopting Topic 606, the entity is precluded from the use of practical expedients in applying the amendments in this Update.

Effective Date and Transition for Entities that Early Adopt Topic 606 Before the Finalization of the Proposed Update

An entity that has adopted the amendments in Topic 606 before the finalization of the amendments in this Update should apply the proposed amendments in this Update using either (a) a retrospective approach or (b) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The entity would also apply the transition disclosures included in the Update.

Early adoption of the amendments in this Update is permitted for all entities, including early adoption within an interim period.

For public entities that have early adopted Topic 606 before the amendments in this Update is finalized, the amendments in this Update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities that have early adopted Topic 606 before the amendments in this Update is finalized, the amendments in this Update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

For purposes of applying the effective date guidance within this Update, and consistent with Topic 606, a public entity would include a not-for-profit entity that has issued, or that is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files financial statements with or furnishes them to the Securities and Exchange Commission.

An entity must use the same practical expedients the entity elected to use when initially applying Topic 606, to the extent applicable, when applying the amendments in this Update.

EITF/Board Meeting Dates

The EITF and Board meeting minutes are provided for the information and convenience of constituents who want to follow the EITF’s and Boards' deliberations. All of the conclusions reported are tentative and may be changed at future EITF or Board meetings. Decisions become final only after a formal written ballot to issue a final standard.